On Friday Kim Jong Un became the first North Korean leader to step foot into South Korean territory since the end of the Korean War in 1953 in a heartfelt meeting with South Korea President Moon Jae-in. The historic meeting was a bit of a tear jerker, with Kim calling for “a new history of peace and prosperity”. The two leaders agreed to move towards formally ending the war and pursue “complete denuclearisation” of the Korean peninsula. While emotionally it was a moving experience, there was little impact on the market given that a risk premium on North Korean risks was priced out some time ago.
On Friday, the only market movement of note was a much weaker GBP. UK GDP rose by just 0.1% q/q in the March quarter, a soft result that followed recent dovish comments by BoE Carney and thereby slashed market expectations of a rate hike next month from around a 60% chance to 20% and sent GBP 1% lower to 1.3780. While poor weather might have been a factor, the data also raised the possibility that underlying growth was weak due to Brexit uncertainty.
US Q1 GDP growth was slightly stronger than expected but had a soft underbelly, including inventory building and the weakest consumer spending since 2013. The employment cost index was stronger than expected, taking wage inflation to its highest rate in a decade. The data marked a turning point for the USD, which weakened about 0.5% through to the close after its upward trend through much of the week. In a nod to the stronger wage data, there was a slight flattening of the yield curve, with the 2-year rate steady while the 10-year rate drifted down by 2½ bps for the session to 2.96%. CFTC data showed record net short positioning for the US 10-year futures contract through to Tuesday, ahead of the move up through the 3% mark and no doubt lop-sided positioning has been a factor in the subsequent retreat in yields.
The only other noteworthy event on Friday was the BoJ policy announcement. The BoJ said that inflation risks are skewed to the downside and "continue to warrant careful attention." In a reality check, the central bank removed its previous wording that it expected to reach its 2% inflation target around fiscal 2019. For some time the market has been sceptical of the BoJ ever meeting its policy target and thus the yen was largely unmoved as a result.
In the day ahead, the ANZ NZ business outlook survey and China PMI data hit the screens early this afternoon, ahead of US spending, income and PCE deflator data tonight. A move up to the Fed’s 2% target for the core PCE deflator wouldn’t surprise, with large year’s series of weak months about to drop out of the annual calculation. Indeed, over coming months we are likely to see an upwards push through the 2% mark. This shouldn’t surprise the market and simply adds to the case for further Fed rate hikes, particularly with labour market data still tightening.
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